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The Municipal Securities Rulemaking Board, or MSRB, has published a draft proposal concerning circumstances under which municipal bond underwriters would violate their duty to deal fairly by consenting to certain amendments to bond authorizing documents. The MSRB is concerned that underwriters are providing bondholder consent to document changes, such as elimination of a reserve fund or change in priority of debt service, in cases that could affect existing bondholders without prior notice.

The proposal, which is a draft interpretive notice about the MSRB’s existing “fair dealing” requirements for underwriters, seeks to address the MSRB’s concern that, in some cases, underwriters have consented to trust indenture or resolution amendments that affect existing parity bondholders, even though those authorizing documents and the official statements for the existing bonds did not provide expressly that underwriters could provide such consents. In some cases, those amendments have reduced the security for existing bondholders by, for example, eliminating debt service reserve fund requirements, or have reduced the value of existing bonds.

The draft notice would describe circumstances under which this practice would violate MSRB Rule G-17’s requirements that brokers, dealers, and municipal securities dealers deal fairly with all persons in the conduct of their municipal securities activities.

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